Island Reversal [LuxAlgo]

The Island Reversal tool allows traders to identify reversal patterns directly on the chart. These patterns signal a potential change in trend, either from bullish to bearish or vice versa.

The tool enables traders to filter these patterns by trend, volume, and range, making it easy to display pure or less constrained island reversals.

🔶 USAGE



An island reversal pattern may indicate a change in trend. It occurs when prices change direction from an uptrend to a downtrend, or vice versa.

This pattern is a great tool for timing the market. Traders should be aware of when these patterns develop and watch how prices behave after the pattern forms.

Now, let's take a closer look at one of these island reversal patterns to highlight its different components.



The different parts are depicted in the image above.

• 1. A trend prior to the pattern
  
• 2. A gap starts the pattern.
  
• 3. A range of prices
  
• 4. A final gap, opposite to the first one, closes the pattern.
  
• 5. In this case, the pattern leads to a bearish trend, which is opposite to the trend in the first step.
  

🔹 Trend, Volume and Range Filters



Enabling the trend filter causes the tool to only detect top island reversals during a bullish trend and bottom island reversals during a bearish trend.

Traders can adjust the size of the detected trend in the settings panel. The larger the trend size, the more relevant the reversal patterns can be.



The volume filter only detects reversal patterns if there is more volume within the range of the pattern than in the preceding trend.

The idea is that more people tend to participate at the top and bottom of a trend as it changes direction.



The tool has two range filters that discriminate the range within the island reversal pattern:

• Horizontality Filter (R2): Based on the R-squared statistic from linear regression, it detects whether the price is moving sideways within the range.
  
• Volatility Filter: Based on long-term volatility, it detects the size of the range within the pattern.
  

The smaller the value in the Horizontality Filter, the more horizontal the prices will be within the range. A larger value will detect more reversal patterns.

The larger the value in the Volatility Filter, the larger the ranges will be. A smaller value will detect fewer reversal patterns.

🔶 SETTINGS

🔹 Trend Filter

• Trend Filter: Enable or disable the trend filter.
  
• Trend Length: Select the size of the detected trend.
  

🔹 Volume Filter

• Volume Filter: Enable or disable the volume filter.
  

🔹 Range Filter

• Horizontality Filter (R2): Enable or disable the Horizontality filter and select a threshold value.
  
• Volatility Filter: Enable or disable the Volatility filter and select the multiplier value.
  

🔹 Style

• Bullish: Select a color for bullish sessions.
  
• Bearish: Select a color for bearish sessions.
  
• Transparency: Select a transparency level from 100 to 0.